When coming up with real estate appraisals licensed agents in the US typically use three methods to come by their valuation figures. The approach depends on the purpose of appraisal, the agent and, most of all, the party requiring the appraisal. Since the three methods can come up with significantly different figures, it’s a good idea to know which method is used by your real estate appraiser. Knowing how appraisals work teaches you to how to improve your home to increase its value.

The Cost Approach

In the cost approach, the land and the property (including features of that property) are figured separately. Then the appraiser factors in any depreciation with age (a garage door built in 1980 is not worth the same as one from 2000) and comes up with a total. Often times, this method is used to create replacement values for insurance purposes.

The Sales Comparison Approach

In this approach, the home is analyzed but so is the entire market. The characteristics of the home, including square feet, improvements and liabilities are compared directly to factual data from other recent sales and this creates the total price. This is the method most often used for private or residential sales and also demonstrates why home valuations can vary so much. Since the value of your home largely depends on the value of other homes, prices can fluctuate greatly.

The Income Capitalization Approach

For commercial or industrial properties, there is more to factor in other than the physical property. Since the building or company also produces an income, then that needs to be added to the total cost of the property. In this case, the appraiser needs to factor in the value of the physical property and also look at average income levels for the property over the last six months to a year. This will give an accurate valuation and an appraisal of a real estate property.